Emerging Markets: Preview of the Week Ahead

(from my colleagues Dr. Win Thin and Ilan Solot)

EM starts the week on a soft footing.  The repercussions of the attacks in Paris are still unclear, but the dollar’s rise against the majors continues and is likely to keep it bid against EM currencies as well.  Equity markets continue to slide, albeit at a modest pace.  MSCI EM is coming up on the 62% retracement objective of its September-November bounce near 809.  A break below would set up a test of the September 29 low near 770.  Anecdotal reports about continued outflows from EM will continue to weigh on sentiment.  For example, EM equities ETFs listed in the US lost over $1 bln in funds, the third straight week of outflows according to Bloomberg data. 

Possibly the most important idiosyncratic factor to watch is the ongoing story about replacing Brazilian Finance Minister Levy, with one major newspaper claiming that he has already signaled to President Dilma his desire to leave the government.  Reports of CNY inclusion in the SDR basket are positive for sentiment at the margin, though the investment implications remain unclear.  Relative calm in Chinese markets could help EM gain some limited traction.

Singapore reports October trade data Tuesday.  NODX are expected at -3.0% y/y vs. +0.3% in September.  The economy is slowing, and we think the MAS will ease policy at its April meeting by adjusting its S$NEER trading band again.  No date has been set yet.  The MAS reduced the rate of S$NEER appreciation at the October meeting, which was more timid than many expected.  MAS had been on hold since the last emergency intra-meeting easing move back in January.

Bank Indonesia meets Tuesday and is expected to keep rates steady at 7.5%.  One lone analyst sees a 25 bp cut, but we think it’s too soon to ease.  CPI rose 6.25% y/y in October, the lowest since November 2014 but still above the 3-5% target range.  Easing in 2016 is possible if disinflation continues.  The bank is primarily focused in currency stability at the moment, and it has taken some macro prudential steps to boost lending.  The last rate move was a 25 bp cut to 7.5% in February.

Hungary central bank meets Tuesday and is expected to keep rates steady at 1.35%.  However, the bank has been getting more dovish.  The bank recently moved the horizon for steady rates out to the end of 2017.  Central bank Vice President Nagy later said it could hold rates steady into 2019.  He then said earlier this week that the bank will ease policy further with “non-conventional” tools rather than rate cuts.  Deflation risks continue, even with CPI coming in at +0.1% y/y in October vs. -0.4% y/y in September.

Colombia reports September IP Tuesday, and is expected to rise 2.1% y/y vs. 2.6% in August.  It then reports September retail sales Wednesday, and are expected to rise 3.2% y/y vs. 5.4% in August.  The next policy meeting is on November 27, and another hike seems likely.  The last move was a bigger than expected 50 bp hike to 5.25% in October.  Inflation was a higher than expected 5.89% y/y October, a new cycle high and further above the 2-4% target range.  Indeed, inflation has been above the target range since January 2015. 

South Africa reports October CPI Wednesday, and is expected to rise 4.7% y/y vs. 4.6% in September.  September retail sales will also be reported, and are expected to rise 4.1% y/y vs. 3.9% in August.  The South African Reserve Bank then meets Thursday and is expected to keep rates steady at 6.0%.  The market is almost evenly split, however.  Of the 26 analysts polled by Bloomberg, 16 see no hike and 10 see a 25 bp hike to 6.25%.  Analysts are also looking for a tightening cycle roughly at a pace of 25 bp per quarter.  This strikes us as too aggressive, and we see a much more cautious approach. 

Chile reports Q3 GDP Wednesday, and is expected to grow 2.1% y/y vs. 1.9% in Q2.  The central bank last week left rates steady at 3.25%, as expected.  Central bank President Vergara said recently that one or two more rate hikes are likely over the next year.  The policy outlook is being complicated by the renewed slide in copper to new cycle lows, which will weigh on growth ahead.

Brazil reports mid-November IPCA inflation Thursday, and is expected to rise 10.25% y/y vs. 9.77% in mid-October.  This would be the highest since November 2003, and would move further above the 3-7% target range.  The second preview of November IGP-M wholesale inflation will also be reported Thursday, and is expected to rise 1.27% m/m.  If sustained for the entire month, the y/y rate would rise to 10.4% y/y from 10.1% in October.  The next policy meeting for Brazil is on November 25.  No change is expected, despite rising price pressures. 

Russia reports October retail sales Thursday, and are expected at -10.0% y/y vs. -10.4% in September.  The next policy meeting is on December 11.  The central bank has kept rates steady at 11.0% since the last 50 bp cut in July.  CPI inflation has decelerated two straight months, but remains too high at 15.6% y/y in October.  We think steady policy is the right decision in light of rising inflation and the weak ruble.  The central bank suggested at its last meeting that easing could be seen in 2016 if the inflation trajectory improves as it expects. 

Poland reports October real retail sales and industrial output Thursday.  The former is expected to rise 3.0% y/y while the latter is expected to rise 2.5% y/y.  The central bank will also release its minutes, and the next policy meeting is on December 2.  No change is expected, and it has kept rates at 1.5% since the last 50 bp cut in March.  While the bank is on hold for now, it will likely get more dovish next year when virtually the entire MPC will be replaced as their terms expire in Q1.  The incoming Law and Justice government has already expressed a desire to stack the MPC with a more growth-oriented staff.

Malaysia reports October CPI Friday, and is expected to rise 2.4% y/y vs. 2.6% in September.  This would be the lowest reading since May. GDP growth slowed to 4.7% y/y in Q3, the slowest since Q2 2013. While the central bank does not have an explicit inflation target, continued disinflation coupled with slowing growth is likely to push it into a more dovish stance in 2016.  Rates have been steady at 3.25% since the last 25 bp hike back in July 2014.  

Taiwan reports October export orders Friday, and are expected at -3.9% y/y vs. -4.5% in September.  The external sector remains weak, with exports contracting y/y for nine straight months.  Orders suggest little relief near-term.  With GDP growth slowing and deflation risks continuing, we see further easing ahead by the central bank. 

Mexico reports Q3 GDP Friday, and is expected to grow 2.4% y/y vs. 2.2% in Q2.  The central bank sounded somewhat less hawkish in its minutes, with some board members wanting to wait until after seeing the impact of the Fed lift-off before deciding on a rate hike or now.  We think that the bank will err on cautiousness, and the discussion about hiking rates before or just after the Fed seems premature to us.  Inflation around 2.5% is at all-time lows, and there appears to be no pass-through from the weak peso.  

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